Earnings Management, Antitrust Investigations, and Business Cycles
Posted: 23 Aug 1998
This paper examines evidence of earnings management pertaining to antitrust investigations over business cycles. The sample consists of firms subject to merger-related antitrust scrutiny under Section 7 of the Clayton Act, during the 1973-1992 period. While industrial organization literature suggests that these firms' earnings management incentives may vary over business cycles, our results indicate that investigated firm choose income-decreasing discretionary accruals during both expansions and recessions, in order to reduce the political costs associated with Clayton Act cases. Consistent with expectations, it appears that firms that settle their cases with the U.S. Department of Justice or the Federal Trade Commission have incentives to manage accruals, even after the initial settlement has been reached, to effect subsequent regulatory-imposed wealth transfers.
JEL Classification: L40, M41
Suggested Citation: Suggested Citation